Mining strikes shrink South Africa’s economy

Months of mining strikes in South Africa pushed its economy into contraction in the first quarter of this year, and with no resolution in sight, the outlook remains bleak.

South Africa's real gross domestic product (GDP) decreased by 0.6 percent in the first three months of the year, with growth in the mining and quarrying industry down 24.7 percent. The decline in mining and quarrying pulled down overall GDP by 1.3 percentage points, according to the country's official statistical agency.

The drop in mining growth was "due to lower production in the mining of gold, the mining of other metal ores (including platinum) and 'other' mining and quarrying (including diamonds)" the agency wrote in its first quarter GDP report.

The mining strikes over pay and working conditions, which restarted on January 23, show no signs of abating and their impact is weighing on the country's largest platinum producers.

Muhahid Safodien | AFP | Getty Images

Striking miners demonstrate in Marikana, 40 kms away from Rustenburg, in the South African platinum belt on May 13, 2014.

"Employees have already lost about 9 billion rand ($900 million), and the companies (Lonmin, Anglo American and Implats) have lost about $2 billion in revenues", Jean-Loic Guieze, Africa economist at BNP Paribas told CNBC by phone.

Lonmin's underlying operating profits for the six months to March dropped to $34 million from $93 million in the same period a year earlier. Anglo American saw its first quarter production of platinum plummet by 39 percent and Impala Platinum said it has lost the equivalent of 5.4 billion rand in revenue in its the quarter ending March 31.

The strikes will continue for "quite a while", Shilan Shah, Africa economist at Capital Economics, told CNBC by phone, as "the union demands are completely out of synch with what mining companies can afford."

BNP Paribas's Guieze explained: "Unions demand monthly salaries of 12,500 rand as early as next year, whereas companies say they can't until 2017."

Despite the fact that strikes could drag on for weeks or months more,a recession is seen as unlikely.

"Even though growth contracted in the first quarter, the drag from the mining strike will now ease off a little bit," said Shah, adding that the country should narrowly avoid a recession.

As the effects of the strikes are now priced in "we should have a sufficient rebound to avoid a contraction in two consecutive quarters," added Guieze.

However, the growth outlook remains bleak, and GDP is unlikely to push above 2 percent for the whole year.

With low growth, unemployment will remain high – it rose to 25.2 percent in the first quarter of 2014 from 24.1 percent in the previous quarter – and consumption will therefore remain subdued.

Additionally, warned Guieze, there is a risk of another strong fall in the rand. The continuation of the strikes means fewer exportsand less currency inflows. This is turn could weigh on foreign investment.

"At this stage a recession in unlikely" concluded Guieze, "but not impossible."